Why Don’t I Own Real Estate?
By Jerry Fetta
Real estate seems to be the infatuation of the investor who has realized they don’t want to invest with Wall Street. I remember back in 2016 when I began to learn about how I didn’t want to represent Wall Street anymore in my business nor invest with them and that’s exactly what I fell into. Real Estate.
Now, I’m not going to write this to shame real estate or tell you it’s a bad deal. Because that wouldn’t be true. Real estate is a great investment for the right person and for the right goal.
You see, when I became interested in real estate the first thing I ran into was a learning barrier. I didn’t know anything about it. I wasn’t a handyman and so from a structural standpoint I didn’t know what I was looking at. I also wasn’t familiar with landlord-ing and so from a business and financial standpoint I didn’t know what I was looking at either.
The more I started to learn, the pathway seemed to line itself up for me. First, talk to a realtor and tell them I wanted to buy a duplex, tri-plex, or four-plex. Then get pre-qualified with a lender. Then go shopping for my new cash flowing asset. Only, it didn’t happen that way because I’m me and of course I couldn’t just blindly follow the path and I began thinking for myself rather critically to try and understand why I should own real estate.
Luckily, I knew my goal. Passive income. Meaning income that shows up on a recurring basis that I do not have to trade any time (or at the most very little time) for. Well the learning definitely wasn’t passive. I spent MONTHS studying real estate and even considered getting licensed. I actually bought a pre-licensing course, began studying, and spoke with several brokers about it. Now, learning is necessary and should be a requisite with any investment. But I don’t think most people actually do it.
Then I started looking at numbers. I was calculating gross rents, cap rates, net operating incomes, management fees, operating costs, property taxes, insurance, etc. Why? Because nobody would share these numbers with me. People would gladly tell me the cap rate and the net operating income, but that wasn’t the number I wanted. I wanted Cash Flow Before Taxes. If I put x dollars in, how many do I get out after all costs and expenditures and before taxes.
So I dug deep and did research on property tax records, insurance costs, and all of the nitty gritty numbers I could find and I did the math on owning a four-plex. And I couldn’t believe what I came up with. In fact, I was so disappointed that I did the math over again several times just to be sure I did it right and even called a few realtors to ask them if my numbers were on track. My math showed if I bought a four-plex, lived in one unit, and rented the others out I would only cash flow $300-$500/mo at best.
Now, I did have to consider the fact that I’d be renting for free because I’d be living in one unit. But the more I thought about that I didn’t like it either. If I was the landlord, I didn’t want to live across the hall from my tenants. I already owned a business at that point and I thought about all of the questions, inquiries, etc. that I get from my clients and how it would feel for me if they had my personal address to come knock on my door with these requests. Not only that, but at least I enjoyed the subject matter of my business and so the questions I got there weren’t a bother. But if it was toilets, water heaters, rent, and noise complaints…those aren’t things I enjoy or care about and that would be a bother.
So I knew what my estimated cash flow would be. But cash flow isn’t passive income and I knew that. I had to do a separate analysis on how passive this income would be. I already knew that there was going to be the risk that tenants would come bother me. But how about maintenance? Improvements? Repairs? Shopping for materials for these projects? Vetting contractors? Doing back ground checks? Evicting people? Enforcing the rules? This wasn’t passive at all. It was a $400/mo part time landlord job. That’s not at all what I was looking for.
Then I had a stroke of genius. I’d just hire a property management company to do it all for me so that I can just live in my unit and route all of the problems to the manager. It took a while to get a good answer on how much property managers charge to do their job. But I finally got my answer and they charge about 10% of the gross rents collected plus they assess fees for other things too. I began doing the math and came to the realization that if I hired a property manager, I’d actually be losing money every month.
So my options were invest in real estate and inherit a part time $400/mo landlord job (not passive income at all). Or hire a property manager and have no job but also no income (passive or not).
As a last ditch effort I began to look around at my peers who were investing in real estate because just maybe I would see an exception to my math and feel better. So I looked, and interviewed, and asked questions and I saw the same thing. Those who were just starting out either were part time landlords for $400/mo or less or they hired management companies and they didn’t actually earn any cash flow at all. The ones who were successful in real estate had grinded through doing this on 5 or more properties until they had built up enough cash flow for their real estate venture to pay for itself.
So I had to ask myself, do I want to do this on 5 properties before it turns into a passive investment?
For me the answer was and is no.
What do I do instead?
Well the common thing every single one of these real estate investors and real estate deals had was a mortgage. They all had to borrow money from a bank to buy their real estate. The bank was a silent partner in every single deal they did and a truly passive income earner at that with way better downside protection as a lender than an owner could ever have. The bank didn’t want their equity. They didn’t want to be partners. They wanted these real estate investment end users to borrow their money to buy a valuable asset and then pay the bank every month.
Long story short, I became the bank. I don’t own real estate, but I lend on well over $1 million worth of real estate as the mortgage. I don’t get calls from tenants. I’ve never had to fix anything. When 2020 happened and tenants legally didn’t have to pay rent, I still received my interest payments. The checks show up every month and I do nothing. Which is the definition of passive income.
Real estate could offer me ownership, tax benefits, appreciation, and even some personal pride and peer recognition, but it could not immediately offer me the one thing I wanted: Passive Income. And all of those other benefits I later learned I could get elsewhere without the headache of owning property and managing tenants.
In the future I’ll write more about how to be the bank, but I hope this article gives you a new viewpoint on being a real estate investor. It isn’t a silver bullet and while it eventually may lead to financial freedom, in the short to mid-term it actually reduces financial freedom. I look at it as a college degree. Being able to say “I’m a real estate investor” doesn’t actually mean anything if I don’t have passive income contributing to my financial freedom just like holding up a degree doesn’t mean anything if I’m not succeeding in the field I studied for and making more money than the degree cost me.
If you’d like to learn more about how I loan money out as the bank, grab a free copy of my book How To Create Wealth (click here).
To Purpose, Wealth, and Freedom.
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com